Lupin: Q3 shows further rise in US pricing pressure as net profit falls 65%

Gross profit margins fell to a 16-quarter low, pulling down earnings by 65% y-o-y

Lupin once again disappointed the Street when its net profit for the December 2017 (Q3) quarter missed expectations by a huge margin, mainly due to high pricing pressure in its US business.

Even as earnings were affected by foreign exchange loss of Rs 821 million and re-measurement of deferred tax assets/liabilities of Rs 361 million pertaining to a new US tax regime, the significant miss at the operating level indicates that price erosion in the US base business continues to take a toll.

Gross profit margins — net sales minus cost of production — fell to 64.3 per cent in Q3, the lowest in 16 quarters. It was down 250 basis points (bps) over the September 2017 quarter and 620 bps over the year-ago period.

With its Goa and Pithampur (Indore) plants having received warning letters from the US drug regulator (FDA), there have been no major product launches that could pull up profitability and sales of its US business, which contribute a little over a third of Lupin’s sales. 

US sales fell 34 per cent year-on-year (y-o-y) in Q3. Worse, domestic sales (a fourth of its top line) grew a tepid 7.8 per cent y-o-y. As most of inventory adjustments related to the goods and services tax are behind, the Street was expecting double-digit growth in India.

Overall, Lupin’s consolidated sales at Rs 39 billion, down 11.5 per cent y-o-y, were near consensus estimates of Rs 39.68 billion. Operating profit at Rs 6.88 billion was down 43.5 per cent y-o-y. Margins slipped to 17.6 per cent from 22 per cent in Q2 FY18 and 27.7 per cent a year ago.

Net profit at Rs 2.22 billion plunged 65 per cent y-o-y, missing consensus estimates of Rs 4.26 billion. Even if one-offs are adjusted for, profit was lower-than-expected.

Lupin’s stock price slumped to Rs 790 (a 53-month low) intra-day before closing at Rs 802, down 5.9 per cent, on Tuesday. 

Pricing pressure in the US is expected to continue. However, a large part of this pain is priced in, said analysts. 

Ranbir Singh at Systematix Shares said one could look at the stock at current levels for recovery from here on. Some said Lupin in the process of responding to the warning letters should be able to resolve issues in calender year 2018. The company’s management said it planned to complete all remediation and invite the FDA for inspection by June 2018. It also plans to launch over 10 products in the US during the March quarter. 

Analysts at Motilal Oswal Securities, prior to results, had said though the stock would remain under pressure in near term, key approvals in the US and resolution of warning letters (expected in 12 months) would help create value in 12-18 months.

Given the track record of Indian companies, it may be worth waiting for the FDA resolution before considering the stock.